Powerless Politicians? Powerful Businesses?

Many governments will face reduced legitimacy due to a loss of control over economy.

209 McRae (1994), p. 142f.

210 Skjølberg (2000), p. 12. One should also keep in mind that FDI does not build critical infrastructure, nor does it provide public goods.

211 Gamba (1997), p. 3.

212 McRae (1994), p. 139f.

213 Finsterbusch for one suggests that “[u]nderdeveloped countries and terrorist groups might also war or terrorize rich countries, demanding a greater sharing of world wealth and resources.” Finsterbusch (1981), p.

162. See also Queiser Morales’ view that the industrial world is waging war on the developing world. (Ref?)

When discussing the distribution of power over the economy, the central question concerns the role of national governments and the extent to which their influence has been reduced.

According to Castells, “the new power system is characterised by the plurality of sources of authority and power, the nation state being just one of these sources.”²¹⁴ The role of the state in the economy is complex and is influenced by a number of factors: (1) The state’s political and cultural complexion and strength of institutions and interest groups. (2) The size of the national economy, especially that of the domestic market. (3) The state’s resource

endowment, both physical and human. (4) The state’s relative position in the world economy, including its level of economic development and degree of industrialisation.²¹⁵ It is

particularly the first aspect that is addressed in the current section. Has the legitimacy of the state been affected and who are the challengers to state authority?

In the further discussion, it is important to distinguish between trade and finance. Whereas governments maintain control over trade, they are rather ineffectual in regulating – and perhaps unwilling to regulate – cash flows. Similarly, the “rise of power of the financial markets, together with their increasingly international nature, has inevitably reduced the power of individual national governments.”²¹⁶ Nevertheless, business cannot escape their territorial affiliation and Jones points out that “[t]he persistent national influence on

international business has been one of the most striking features of continuity.”²¹⁷ The state still forms the territorial basis for business, in that it is the place of business and provides the rules for business activity. Although boundaries become more permeable, national

governments continue to exercises control over their economy by providing specific cultural, political, social and economic conditions for the economic activity within its borders and by setting concrete rules for economic activity in three major policy areas: trade, Foreign Direct Investment (FDI), and industry.²¹⁸

A key to the legitimacy of the state has been its role in maximising social justice among its citizens in the context of the welfare state. As the “fiscal squeeze on public goods” grows tighter, the ability of the state to sustain social welfare may be reduced and national

governments struggle with challenges to their legitimacy.²¹⁹ In an ageing society the pressure will be especially strong on a government to get “health and education right.”²²⁰ A counter development to the weakened role of the state, is the growth in the service industry that will fill some of the gap left by the state. When market mechanisms and private business interests fail to adequately fulfil the part of the state, the state must either re-establish control in order to safeguard social cohesion and a strong community or risk challenges to its legitimacy.²²¹ As

214 Castells (1997), p. 303

215 Dicken highlights these four factors. Dicken (1998), p. 88.

216 McRae (1994), p. 142, 144.

217 Jones (1996), p. 309.

218 With respect to the first, the state can act through international regulatory frameworks, which do not exist for two and three. Dicken (1998), p. 112f.

219 Human Development Report 1999, p. 2; see also Rodrik (1997), p. 6.

220 McRae (1994), p. 107.

221 Human Development Report 1999, p. 7.

these types of services for the most part cannot be internationally traded, the governments will also have a relatively larger influence on them through regulation and/or legislation.²²²

The most influential challengers to state authority are Multinational or Transnational Corporations (MNCs or TNCs). The relationship between states and TNCs has undergone some changes over the years. Following a period of growing restrictiveness in the 70s and 80s, states have moved from wanting to control TNCs, to wanting to attract them – often by providing a less restrictive environment than other countries. TNCs are attractive to states, as they bring with them technology and access to markets, allowing states to partake in the benefits of their presence.²²³ The opposite is also true: TNCs profit from “a range of collective goods that are valuable to firms and investors [and] may at least balance the costs of

interventionist government.”²²⁴ Similarly, Dicken argues against the conception that TNCs have no territorial affiliation and can therefore not evade all national political control. In fact, there is an interaction between states and TNCs in which the state provides a cultural and other framework for the TNC, while the TNC affects states and communities in which they operate.²²⁵ States need TNCs to create the wealth that is a necessary ingredient in their legitimacy, but TNCs depend on the infrastructure provided by a state. The specific

relationship will depend on both sides’ perception of their costs and benefits and their relative bargaining power. Clearly, “TNCs tie national and local economies more closely into the global economy.”²²⁶

Transnational corporations (TNCs) may be significant political actors, through their ability to put pressure on and lobby foreign governments. As Willett has observed, “TNCs have the ability to evade government attempts to control financial flows, to impose trade sanctions or to regulate production. [As a result,] the sovereignty of most governments is significantly reduced.”²²⁷ Although Hirst and Thompson make the reservation that TNCs remain heavily

“nationally embedded,” they agree that “it is beyond the powers of national governments to regulate these companies.”²²⁸

There are other trends that cloud the picture of the ever more powerful TNC. First, the high degree of capital mobility favours smaller more ‘nimble’ companies that can adjust more easily to new conditions and that can move around more freely. However, they will not be able to evade national regulation as easily as larger companies might. Second, shareholders will increasingly come from several different countries, resulting in more foreign ownership.

222 McRae (1994), p. 107, 195-9.

223 Jones (1996), p. 304. One benefit is that TNCs function as vehicles for the transfer of information and technology, which promotes trade flows and disseminates organisational and managerial skills. Jones (1996), p.

314. See also Narula and Dunning (1999), pp. 262, 268, 275.

224 Garrett (1998), p. 791, 823.

225 Dicken (1998), p. 199f., 275; Hirst and Thompson (1996), p. 95.

226 Dicken (1998), p. 276.

227 For a detailed description of how TNCs evade government regulation, see Willetts (1999), p. 290-296. See also Human Development Report 1999, p. 8-10, 12.

228 Hirst and Thompson (1996), p. 98. As mentioned in Chapter 4, power structures extend over borders featuring

“transnational alliances among the world’s largest firms” rather than simple TNC-host government relationships.

Bornschier and Chase-Dunn (1999), p. 1f.

McRae points out that “very large international transfers of funds, where people in one country end up owning enormous assets in another, is not a stable situation and will be a source of continuing tension which will need to be handled with great care on every side.”²²⁹ The role of TNCs is of particular concern due to their control over global food production.²³⁰ As food markets continue to be internationalised, “the power of such companies is set to increase.”²³¹ Given the inequality between regions, control by private enterprises over food production is a sensitive issue. In order to deflect tensions, global efforts to fill the gap left open by domestic deregulation through global re-regulation are underway. It is increasingly understood that irresponsible behaviour by TNCs can be dealt with if governments act collectively.²³² McRae suggests that “the whole process of trade liberalization has come to a halt: we may have reached a plateau from which further advance is politically impossible.”²³³ While MNCs might increase their political importance and economic power, they are unlikely to gain more political room to manoeuvre. On the contrary, they will increasingly be subject to political scrutiny and control by both national and supranational bodies and be more sensitive to political considerations.

Calls for controlling the forces of globalisation are increasingly being heard and Vollebæk underlines the need to strengthen international institutions to manage “the forces of

globalization – its speed and its direction.”²³⁴ Calls also reflect a desire to devise both formal and informal mechanisms to make ethical standards and human rights binding for

corporations and individuals. The goal is accountability and an established view that

economic growth is an instrument towards human well-being rather than an end in itself. As mentioned above, multilateral co-operation in this and other fields is likely to increase in the future.

Different parts of the national economic policy will be affected by international regulations to various degrees. As mentioned above, trade policy is subject to extensive supervision through international regulatory frameworks, such as under the GATT – since 1947 – or the WTO – since 1995. For instance, “[t]he WTO represents a rule-oriented approach to multilateral trade co-operation rather than one which is based on results.”²³⁵ Rules can also be implemented in the context of regional blocs, which have a “considerable influence on patterns of world trade.”²³⁶ But most have not progressed beyond free trade arrangements, EU and NAFTA being the major exceptions.²³⁷

229 McRae (1994), p. 163.

230 Thomas (1999), p. 465.

231 Thomas (1999), p. 465.

232 Willetts (1999); Hirst and Thompson (1996), p. 98.

233 McRae (1994), p. 161.

234 Vollebæk (2000), p. 21f. The Human Development Report writes that “[t]he challenge is to find the rules and institutions for stronger governance – local, national, regional and global – to preserve the advantages of global markets and competition, but also to provide enough space for human, community and environmental resources to ensure that globalization works for people – not just for profits.”Human Development Report 1999, p. 2.

235 Dicken (1998), p. 96.

236 Dicken (1998), p. 103.

237 Dicken (1998), p. 113.

5.3.1 Will Private Business Become the Prime Terrorist Targets? And New Sponsors of Terrorism?

We have seen that globalisation and the rise of TNCs pose several challenges to the legitimacy of the state, the lack of which has been associated with social tensions and terrorism. The withdrawal of the state from its welfare functions matches the trend towards individualisation in the labour market and the greater reliance on private savings. This entails that those that have no savings ‘fall off the wagon’ and inequality increases. Where the state is being undermined, its authority, but not its responsibility is being replaced by TNCs.

Although they contribute to economic growth, they do not necessarily bring internal stability, as TNCs “have not provided any convincing response to the erosion of the notions of security and predictability in people’s lives.”²³⁸ In the worst case, the effects of the policies of

powerful TNCs will provide the focus for the formation of protest movements for whom the TNCs are the ultimate symbol of turbo-capitalism and global injustice. One may predict a future shift in focus for terrorist groups away from states and symbols of the state towards businesses and TNCs.

Should actual progress in international re-regulation reflect the idealistic notions currently being put forward, they would serve to contribute to stability and strengthen the legitimacy of states in developing countries by taking account of fringe interests that otherwise have been shown to encourage ideological terrorism. Alternatively, there is a danger of breeding antagonism in developing countries and of heightening the existing gaps between rich and poor countries, when regional regulatory arrangements function in an exclusionary or protectionist manner.²³⁹ As mentioned above, social injustice across regions has been identified as a source of ideological terrorism.

One side-effect of the drive for marketisation, privatisation and globalisation of the economy is the accumulation of wealth in private hands. Already, a number of private individuals have private capital far beyond the annual GDP of the majority of the world’s states. We have also seen that private companies have been sufficiently powerful in financial terms to cause severe currency crises for states. In this context, it is interesting to note the emergence of the

phenomenon of private sponsors of terrorism, namely the network of radical Islamist groups reportedly sponsored by the Saudi dissident Usama Ben Laden. If the current trend towards large private capital accumulation continues, one may predict that the recent example of private sponsors of terrorism will not be the last.